Charitable Payment from a Discretionary Trust

Trusts Discussion
1

I act for the trustees of a discretionary settlement. The trustees have significant undistributed and unaccumulated income and each year have made income payments to beneficiaries at their discretion. Such income payments are franked with income from the trustees tax pool (45% at current rates) and depending on the beneficiaries circumstances they are able to reclaim this in whole or in part from HMRC.

This was the position in 2015/2016. However, the trustees also made a payment to a well known charity during the year.

I am seeking to ascertain the reporting requirements and the tax treatment of this.

It would appear that the charitable payment would also need to be included with the other discretionary income payments on the tax return. However, this payment would then be franked with a tax credit of 45% from the trustees’ tax pool?

Is this correct given that a charity can only usually reclaim basic rate tax (which would mean that there may be a loss of tax (i.e. 45% - less basic rate), or can the charity reclaim the full amount of tax in this case.

Andrew Magilton
TFO Tax LLP

2

On what authority did the trustees make a charitable donation/distribution? Is the charity among the class of discretionary income beneficiaries?
Would the payment perhaps be better classified as a discretionary distribution to one of the normal recipients and subsequently a charitable donation under gift aid by that individual?
If the charitable gift was found to be valid and evidenced by a form R185 then they should be able to reclaim the full tax credit, although I’m not sure that HMRC’s online tax reclaim facility could cope!
Maxine Higgins
Citroen Wells

3

If it is a discretionary payment of income, then yes it has a 45% tax credit from the ‘pool’.

There should be no problem in recovering the 45% tax credit - the amount received is just taxed income, not a gift aid receipt restricted to basic rate tax. Have reclaimed without issue in similar circumstances many times.

David Hartles
Shipleys LLP

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